This blog is about macro-economics, financial markets and the world that has been pulled over your eyes to blind you from the truth.

— Neo: What truth?
— Morpheus: That you are a slave, Neo.

2010-05-26

Relapse and fall down? Or rebound?

As I mentioned yesterday, the strong rally yesterday moved the markets from being deeply oversold to being deeply overbought very short term. So the fact that the rally today soured isn't really surprising and is pretty much normal — provided anything that deals with the markets can be tagged as normal.

More interestingly, David Rosenberg dug up the following very interesting historical fact in his market musing today, available from Gluskin Sheff (free subscription required):

There have only been two other times when the stock market ran parabolically up from a low in barely over a year, as was the case this time around (+80% from March 2009 to April 2010): the 112% surge from June 1, 1932 to September 7, 1932; and the 116% run up from March 2, 1933 to July 18, 1933. In the first case, we had a 40% correction and in the second, the correction was 34%. So, we are talking here about the prospect of a pretty hefty reversal in the S&P 500 that could very easily take the index down to as low as 850, if the history of these types of givebacks is any indication.

This is not something to ignore as it would mean that there's potentially another 15 to 20% down leg to follow and what's even more striking is that it confirms the high degree of similarities about what we are living since the greatest credit bubble of history and the roaring twenties: we are in the Greatest Depression, and the only available point of comparison remains to be the Great Depression itself.

I have charted those periods that you will find below (click for bigger pictures):

Oddly enough, it appears that the bottom was on the 7th of July 1932 and not 1st of June and that the run was in the 95% and not 112% — unless Yahoo's data is not 100% correct.

Also worth noting is that the decline was not in a straight line — they never are. It took each time several month before hitting the cyclical low and the rallies in between were very sharp rally: the markets like to suck in and slaughter as many bears as possible immediately and then the bulls just a few weeks later, by a slow but even more painful torturous death.